The (Big) Problem with RADs
Much of the fear in the aged community around finance - potentially limiting both expenditure and quality of life - stems from a perception that retirees, and self funded retirees particularly, will need to have access to large amounts of capital if they need residential aged care. The "large amounts of capital" take the form of Residential Accommodation Deposits or RADs advertised on the MyAgedcare website. Even ASIC mistakenly reinforces the message, recently arguing that one of the problems with reverse mortgages was that many borrowers might not be left with access to $380,000, "which is the average self-funded upfront cost of aged care for one person".
So, what is the problems with RADs from our perspective and why should most people not focus too strongly on maintaining access to these large sums?
1. At most, only about half the retired population will be admitted to residential aged care
Assessing what proportion of people will actually need residential aged care is a complex question, but let's start by considering the following paragraph from the Royal Commission on Ageing:
"It is important to understand the likelihood of a person not in aged care entering into aged care at some time in the future in understanding the demand that population ageing will put on the need for aged care. This likelihood is termed lifetime risk of entry. The lifetime risk of entry to permanent residential aged care is not well understood, perhaps because, as ....at age 80 years only 4.0% of men and 5.6% of women were receiving permanent residential aged care at any one time. Even at age 90 years, only 17.9% of men and 29.9% of women were receiving permanent residential aged care at any one time."
Royal Commission on Ageing, Background Paper 2. p 14 - our emphasis
The background paper then goes on to indicate that admission rates "understate" the likelihood that an individual will require permanent residential aged care at some time in their life. It is believed that using what is called "life table analysis" provides a better indication of the lifetime risk of admission to permanent residential aged care, and on that basis the following estimate was provided:
"The estimated remaining lifetime risk at age 65 years of first admission to permanent residential aged care has also increased significantly between 2000 and 2014 from 33.5% to 42.8% for men, and from 53.8% to 59.3% for women."
Royal Commission on Ageing, Background Paper 2. p 25 - our emphasis
We believe that there is an insufficient information provided regarding the large apparent gulf between these estimates and current admission rates, but presume that most, if not all, of the difference results from projected increases in longevity and associated rates of dementia. We are uncomfortable accepting estimates without more information, but we think its appropriate to adopt a (conservative) working assumption that about half of Australians may expect to be admitted to permanent residential aged care after age 65 at some point in their life.
2. You will access any residential care late in life, "won't stay long" and will use only a small portion of any RAD
Averages need to be used with care but consider the following.
1. Access to residential aged care will usually happen, if it happens at all, late in life:
"The average age on admission to permanent residential aged care was 82.3 years for men and 84.6 years for women."
2018–19 Report on the Operation of the Aged Care Act, p 5
2. Providing residential aged care is an expensive process and, rightly, it will not be available if you are in "good health" - very prolonged stays are rare:
"The average length of stay for permanent residential aged care was almost 30 months.... People who died in permanent residential care had the longest average length of stay at 32 months, or two years and eight months. The most common reason for leaving permanent care was death (82%),
Royal Commission on Ageing, Background Paper 2. p 25 - our emphasis
To provide more detail about how long individuals spend in residential care - you will see from the chart below that relatively few spend more than 3 years in care:
Some might say these figures are depressing; we are not sure that is actually the case for the individuals involved, or their families. In any event, and acknowledging that we are dealing with averages, what does a 32 month stay amount to in financial terms. Using the $380,000 average RAD figures quoted above you can either pay this as a lump sum to your accommodation provider or a Daily Accommodation Payment (DAP) in lieu. How much would a DAP be in the circumstances - using some averages:
$380,000 x 4.89% (current March, 2020 MIPR) = $50.91 per day
32 months = 960 days x $50.91 per day = $48,873.60
So, even if you or a relative may not be "average" and instead reside comfortably in an aged care residence well beyond 3 years, it would be utterly exceptional for you need the full amount of a RAD to pay for your accommodation. Over and above the basic care fee, which applies to all residents, the only other potential cost is the Means Tested Care Fee, and the maximum applicable fee is $28,087.41 annually, with a maximum lifetime cap of $67,409.85 as at March 2020.
An interesting perspective is that the Life Tables published by the ABS (2013) indicate that a man of 82, and a woman of 85, would expect an average life expectancy of 7.5 years and 7.14 years respectively. The reason why the average stay in residential care is much shorter is because in many/most situations a move into residential care is symptomatic of declining health.
3. RADs institutionalise inheritances and inter-generational transfers
We do not have a problem with individuals wishing to provide inheritances to their family, as long as they are not at the expense of the retiree's lifestyle and are not an unintended and unfair consequence of retirees believing that they need to retain large amounts of capital for RADs - with the great majority of that capital then perhaps passing untaxed as inheritances to relatives and others.
4. Self Funded Retirees - "Once more to the Well"
Self evidently, RADs can only be paid by individuals with capital, and that means that most "customers" will be self-funded retirees. Again we have a situation where those who have not adequately prepared or saved for retirement, or have been unable to do so, are caught by the "safety net", and pay nothing in addition to their pension. These individuals don't have as much flexibility as self-funded retirees, but the approach continues to reinforce poor financial habits.
So, what has been happening in practice?
We are not sure that the aged residential care industry always represents a prime example of a transparent, competitive market place in practice and there are good reasons for a very thorough regulatory framework to ensure that the possibility of elder abuse is minimised or eliminated entirely.
In any event though, there is currently a very clear trend evident away from paying RADs. StewartBrown's Aged Care Financial Performance Survey Sector Report (FY19) includes a comment that, there was an "increase in preference for DAPs over RADs - the split is now 29% RAD, 47% DAP and 24% combination." Given the recent general reduction in interest rates, which have led to a reduced MPIR, the expectation is that this trend will continue.
If any group should be looked at for advice in this area it is Actuaries, and they seem in agreement that RADs are a poor form of funding
"The Actuaries Institute’s Green Paper ‘Options for an Improved and Integrated System of Retirement’ has suggested that Refundable Accommodation Deposits (that currently can be used to fund aged care) are undesirable as they create anxiety for retirees who become concerned that they might need to find significant lump sums at short notice. The paper suggests that these are undesirable and should be phased out."
Developing the retirement income framework - Retirement Incomes Working Group, July 2020 p7.
- In the great majority of situations retirees will not need to put aside the type of capital that RADs suggest in order to cover the care you "might" need in residential aged accommodation.
- We would like to see aged care providers "compete" on the basis of DAPs, rather than quoting headline RADs.
- The "market" does not understand that everyone in aged residential care should receive the same quality of care, and that RADs or other accommodation payments only reflect differences in the quality of accommodation - so, there should be a move to differentiate through varying levels of one payment, the DAP.
- If the family of a resident contribute to a RAD - to provide better accommodation - it can generate issues around repayment (a RAD is considered part of the resident's estate) and give rise to additional means tested care fee payments. Contributing to a DAP may be more practical and efficient.
- We would like to see more innovation around catering for "longevity risk" - for example, potentially providing access to tontines. It is patently absurd for most of the retiree population to be worrying about financing residential care accommodation when they will not be customers; removing or reducing this risk would have considerable societal and economic benefits.
- Other alternatives to funding capital costs within the aged care community should to be considered, rather than RADs; this could include participation from the large superannuation funds